Crypto’s Role in Times of Political and Economic Uncertainty
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Crypto’s Role in Times of Political and Economic Uncertainty

1 year ago

With the world thrown into chaos by a pandemic (among other things) — what role does crypto play in helping out with economic crises?

Crypto’s Role in Times of Political and Economic Uncertainty

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Crypto’s Role in Times of Political and Economic Uncertainty

The high adoption rate of digital assets during periods of economic uncertainty has become a recurring trend. For instance, all throughout 2020, the crypto market thrived amid pandemic-induced financial crises. Many argue that crypto’s heightened appeal in times of economic and political tension suggests that crypto can provide an escape from the deleterious impact of economic and other systemic instabilities.

In this guide, we will investigate this argument and try to understand crypto’s role in these periods of unrest.

Digital Assets: A Viable Financial Alternative Amid Economic Instability

Since Bitcoin's inception, the crypto industry has had to weather several storms and setbacks. In most cases, these backlashes are sparked by a recognition of the disruptive potential that crypto presents. Before the advent of digital assets, governments and banks were the undisputed custodians of the global financial economy. Since they had total control over the creation and flow of money, little happened that was beyond their scope or knowledge. 
Understandably, the emergence of decentralized currency was bound to ruffle a few feathers, considering the level of autonomy that it offers users. Financial freedom, which was a utopian idea before the creation of Bitcoin, became a real possibility. Nonetheless, as we have come to discover, absolute freedom has its dangers. For one, illicit entities continue to capitalize on the perceived privacy of crypto transactions. Likewise, price volatility and the speculative nature of digital asset markets remain key risks for cryptocurrency holders. 

However, none of this matters to those who have no other choice but to opt for an alternative monetary system that can potentially shield them from the adverse effects of economic or political crises. Unlike the prevailing perception of many citizens in a fairly stable economy, those living in economically unstable countries often view crypto as a necessity, especially when their local currencies are devaluing at an alarming rate.

Take Nigeria as a case study. Despite severe crypto restrictions imposed by the country’s central bank, the nation constantly tops the list of countries generating the highest volume of Bitcoin-related searches on Google. Nigeria also leads the way in Bitcoin peer-to-peer trading volume in Africa, with over $8 million worth of transactions averaged weekly as of May 2021. Among the factors propelling crypto adoption in Nigeria are high inflation rates and difficulties with much-needed remittance flows.
In Turkey, crypto is fast becoming an alternative to the country’s depreciating local currency. Turkey scored 29th globally and was the top-ranked country in the Middle East in the 2020 Crypto Adoption Index, according to blockchain intelligence firm Chainalysis. Crypto is booming in Turkey, apparently due to high inflation and unemployment rates. The situation has become even more difficult due to political interference in the operations of the nation’s central bank. Between 2019 and 2021, Recep Tayyip Erdoğan, the country’s president, unexpectedly sacked three central bank governors.
Notably, Ukraine also falls into the category of countries witnessing high levels of crypto adoption amid a backdrop of economic instability. However, unlike Nigeria and Turkey, Ukraine’s economic difficulties stem, in part, from the protracted conflict in the east of the country. Many of the country’s tech-savvier citizens have thus turned to crypto to escape the adverse financial impact tied to this political and civil unrest. 
All the examples noted above have one thing in common: a young and/or tech-savvy population. Turkey is the most youthful country in Europe, with youth representing 15.6% of its population. Ukraine is home to a fast-rising software outsourcing industry. According to the United Nations, 62% of Nigeria’s population is aged 25 years and below. 

In essence, crypto thrives in these countries because their citizens have quickly realized that crypto can offer viable solutions to their current predicament. Where the demography of these countries is skewed towards a higher prevalence of tech-literate youth, this trend is all the starker.

Another notable factor is the restrictions associated with traditional finance systems. The depreciation in the value of a country's local currency severely diminishes the purchasing power of its citizens. Affected businesses and individuals are therefore forced to hold their funds in foreign currencies, especially in U.S. dollars. Increased demand for foreign currency often leads to its shortage, and when it is difficult to access the dollar, the next best option for many is digital currencies. 

Moreover, most of these countries are heavily reliant upon remittances. Notably, the existing drawbacks of traditional remittance channels, including slow transaction speed and high fees, have spurred users to opt for more direct and often more affordable crypto-enabled channels. Using crypto also makes it easier to access international markets, which is all the more important for import-oriented economies that are battling inflation. 

Will Crypto Continue to Thrive in Chaos?

Although the examples mentioned in this guide focus on the high adoption rates of crypto in a small number of countries, 2020 revealed crypto’s potential as an alternative to an uncertain economy at global scale. The decentralized finance market has seen unprecedented growth in response to the reduction of interest rates in traditional financial markets. This was followed by the digital gold (aka Bitcoin) rush, spurred by an increased demand for inflation-hedging financial instruments. 

For what it’s worth, these events demonstrate that crypto tends to find more success when the population loses confidence in the traditional financial system. If this is the case, then there is a high likelihood that the crypto industry will experience more growth as governments struggle to manage new economic realities.

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